Investors Observer Workshop. Wednesday, March 22, noon ET

Transcription

1 Investors Observer Workshop Wednesday, March 22, noon ET

2 Debby Clowney MBA, Chicago Booth BA, U. of Pennsylvania 20+ years options experience Worked on Wall Street Consultant for KPMG Workshop Coach: Debby Clowney Our goal today is to provide a workshop where we discuss how to translate the Trade Idea Generator s ideas into profitable trades. We will talk both concepts and practical tips to make and manage the trades. We encourage you to ask questions throughout the workshop. If you have a question, likely others have the same question. My colleague, Bobby Raines, will be joining us and fielding questions or bringing them to my attention as we go along. To get the most out of today s workshop, I will ask that you have your Trade Idea Generator launched and during the case studies that you follow along with me. Jot down names of stocks you would like me to review in the Firing Line portion of our workshop.

3 Disclaimer Today s webinar is for educational purposes only. Nothing in today s presentation should be considered a recommendation to buy or sell any security. All stocks and options shown are examples only. Any pricing or potential profitability shown does not take into account your trade size, brokerage commissions or taxes which will affect actual investment returns. Stocks and options involve risk and are not suitable for all investors and investing in options carries substantial risk. Past stock or option performance is no guarantee of future price appreciation or depreciation. Prior to buying or selling options, a person must receive a copy of Characteristics and Risks of Standardized Options available at:

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5 What we will do in our STATE OF THE MARKETS Profit taking after the Trump rally runup What is the S&P weekly chart telling us about overall trends? Zeroing in on the S&P daily chart How is the Nasdaq doing compared to the S&P? How are small caps (the Russell) doing compared to the S&P? What is the volatility index telling us? How should market conditions guide our trades?

6 SPY -- testing 50 day moving average Sustained rally after Trump election consolidation Break out Selloff yday Runup to Trump election Trump rally

7 NASDAQ breaking down from its 20 day moving average after a strong run The NASDAQ profit taking on volume Selloff yday Runup to Trump election Initially techs selloff after election NASDAQ goes on a run

8 Small caps were very strong post-election, but then underperformed the SPY and Nasdaq. The Russell failed to break out of its trading range. It is now testing the lows of that range. consolidation Runup to Trump election Small caps outperform initially after the election

9 Highest volume on volatility since before the election The volatility index is sometimes called the fear index, because when the market is under pressure, volatility rises.

10 What we will do in our STRATEGIES Follow up on trades we looked at last session Examining when it is possible to capture full profits early Success in doing so is not just related to the stock price

11 MTZ Sold strike Sold options 3 times for between 1.15 and Nice high volatility. Could take $515 profit, or go again. Got assigned.

12 BAC diagonal trade Stock was way above our 23 strike sold call. We had a good til canceled order to take our max profit, but never got filled. With the market under pressure yesterday, the stock is nearly 12% off its peak, but we are still near our max profits. And we have support at these levels from the highs of 3 months ago in December. Stock this a.m. is above the 23 strike sold call.

13 AA diagonal trade We sold an April call for 2.95 on Feb 8. We bought it back 31 days early for.45 locking in 2.50 of options premium.. If it bounces soon, we can sell another call and collect some additional premium. Our long leg doesn t expire for another 10 months, allowing us many potential opportunities to turn this into a profitable trade.

14 AAPL diagonal trade Jan Call Apr Call The target profit and max profit was $225 The days from entry to expiration was 72 days With the stock considerably above the 130 sold strike, we had a good til canceled order to exit the position at a full profit.. We were able to realize our full profit in just 37 days, increasing the annualized return from 30% to 59%.

15 STX diagonal trade What price would we like to get when we exit this trade? 44 strike 28 strike = $16.00 Can we get our target price early? No. How much profit would we have to give up? Closed at 5c less than full profit at expiration

16 CTXS covered call What price would we like to get when we exit this trade? The strike price of Can we get our target price early? No. How much profit would we have to give up? Nearly half. Closed at full profit at expiration

17 COF vertical What price would we like to get/pay when we exit this trade? 0 so we keep the $85 we collected per contract Can we get our target price early? No. We would have to give back 34 of our target 85 profit. Closed at full profit at expiration

18 Traders could describe yesterday s market action as unwinding the Trump trade. What does this mean? Profit taking in stocks that ran up In the Trump rally, these sectors were strong FINANCIALS were very strong after the Trump election on hopes of decreasing regulation. And a further boost came from interest rate hikes from a stronger economy. INFRASTRUCTURE stocks were helped by Trump s promise of 1 billion dollars of infrastructure spending. What did the unwind look like?

19 What did the unwind look like? Symbol Company 1 day loss Sector STLD Steel Dynamics % Steel X US Steel % Steel SND Smart Sand Inc % Basic Materials BXS Bancorp South % Bank UCBI United Community Banks/GA % Bank

20 What do traders mean about the dangers of catching a falling knife? A dead cat bounce. How would this apply to yesterday s market action. Examples: KITE OLED

21 Daily chart 15 min chart Yesterday

22 Daily chart 15 min chart Yesterday

23 Important icons on your chart Most important Linear Regression, i.e., the channel the stock is trading in

24 Important icons on your chart Comparing a stock to... the market its sector its competitors All Stock Futures Forex CFD Bitcoin Index Economy Quandl You can check a market index type in a sector description or ETF symbol type in a competitor s company name or symbol

25 Support and resistance

26 Featured Trades

27 FIRING LINE What names would you like me to analyze? We can look at the support and resistance lines on these charts Also, a thank you! to the many of you who are completing our survey and letting us know what topics you would like covered in the future, and what is most helpful or what is confusing in our presentations. -- and let us know whether or not your are interested in earning more about candlestick interpretation.

28 Q&A

29 THE END

30 Investors Observer s Option Trading Framework 1 FIND Early exits with full profits Early exits partial profits 5 EXIT Featured Trades Trade Finder 2 CHOOSE Charts News Strategies 4 MANAGE 3 ENTER Managing trades where the option expired worthless Order types What you need to know about your broker

31 1) Why is this position going against me? Wall Street saying: Hope is not traded on any exchange. 2) How do I feel about the underlying stock or ETF now? 3) What is my objective now that the position has moved against me? New Goal 4) Translate your new goal into an action plan.

32 What you can do when a position goes against you How do we decide which of these is best?

33 After expiration when our sold call expires worthless, look to write a new call. When an option expires worthless, and the stock price is close to the strike price, we will frequently sell another call against it by rolling out in time at the same strike price. This is what we did for our Mastec postion.

34 A hard decision: MTZ for early profits? We considered taking partial profits here, but decided to wait for full profits in just a few weeks Sold strike MTZ flirted with its strike price and the option expired worthless on expiration. It bounced the Monday after expiration & we sold an option with a higher strike

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36 Orig Target Profit 1.35 Orig Target Annlzd Return = 29.88% Target Profit 5.15 Target Annlz 50%

37 Managing a trade that went against us 1 Enter position. B/e = now 2 Buy back call for 4c Sell a new call for Mar same strike 4 Where stock is now. For 40% annualized gain

38 Managing a trade that went against us Where we stand now: Closed early for full profit on Feb 24

39 What we will do in our STRATEGIES Ease of managing many hedged trades Understanding position returns vs. annualized returns Comparing returns on in-the-money covered calls, out-of-themoney covered calls and diagonals

40 Which trade is the most profitable?

41 Which trade is the most profitable? 12% 6% 20% 48%

42 Which trade is the most profitable?

43 ITM Covered Calls, Diagonals and OTM Covered Calls

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45 Profits on an OTM Call

46 Let s do some sorting Watch while we sort by different measurements of profitability Elite users will see all of these positions. Others will see only the names of the model portfolios you have subscribed to. Lets sort by:

47 Questions to ask yourself before putting on a trade What is the minimum DOLLAR return I am looking for per contract? Consider what your broker charges for commissions.

48 What should we make of the fact that many analysts are saying: The markets are priced for perfection.? Let s take a look at how stocks are priced now compared to historical averages

49 P/E ratio of com Bubble 29 Crash Shiller PE ratio for the S&P 500. Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 FAQ. Data courtesy of Robert Shiller from his book, Irrational Exuberance.

50 P/E ratios climbing for the past 5 years to pre-crash levels of 28+ Shiller PE ratio for the S&P 500. Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 FAQ. Data courtesy of Robert Shiller from his book, Irrational Exuberance.

51 CASE P/E ratios climbing for the past 5 years to pre-crash levels of 28+, but not at levels of dot com bubble

52 Apple earnings Apple beat on earnings, beat on revenues and guided down on revenues for the next quarter. Apple is very adept at managing earnings expectations.

53 Cirrus is a big supplier to Apple CRUS reaction to Apple earnings beat. CRUS reports the next day. CRUS beats by 25c, beats on revs, earnings more than 2x previous year. Stock gaps down and ends day 10% lower.

54 Featured Trades

55 What we will do in our STATE OF THE MARKETS What is the S&P weekly chart telling us about overall trends? Zeroing in on the S&P daily chart How is the Nasdaq doing compared to the S&P? What is the volatility index telling us? How should market conditions guide our trades?

56 SPY: has taken out last summer s highs on the Trump rally

57 Nasdaq began showing strength this week NASDAQ has finally taken out its 2016 fall highs.

58 Small were very strong post-election, but are now below their mid-december peaks. This is the Russell 2000.

59 Volatility spiked pre- Election but has fallen to new lows on the Trump rally Pre-election jitters The S&P and Dow average daily moves have dropped to abou 2/3rds of 1 percent, rather than their more normal 1+% daily move Postelection rally The volatility index is sometimes called the fear index, because when the market is under pressure, volatility rises.

60 Managing a Model Portfolio trade

61 1) Why is this position going against me? 2) How do I feel about the underlying stock or ETF now? 3) What is my objective now that the position has moved against me? New Goal 4) Translate your new goal into an action plan.

62 Buy back the sold option and wait for a bounce before writing a new call. Whenever your sold option becomes almost worthless, it is wise to buy it back. It is not providing any more downside protection and if the stock bounces you can sell another call, collecting 2 option premiums instead of just one.

63 What happened to the CSCO trade Trade Entry, collect $90 premium for selling Jan 32 call 2 Buy back call expiring in January on Dec 2 at lows for $4 3 Look to sell add-on call. Can roll out to Feb 31C or Mar 31C or 32C. 2 In a trading range, but toying with 50 day moving average Techs hit hard after Trump election

64 Where we stand now -.33, i.e, -$ Look to sell add-on call. Let s look at what s available. 2

65 Add-on calls that we could sell -.33, -$33 Let s say we decide to sell the Mar 32 call at.51c. What would we call that action? (Remember that we already bought back the first call we sold. Rolling out How would this choice affect our P&L?

66 New P&L This traces what happens to our P&L if we do the March 32C follow-on trade at yesterday s prices What does this give us? The chance to make > $$ A 2nd chance for CSCO to be above 32 A similar annualized return to our original position

67 TIG Screens

68 NEXT WORKSHOP

69 FIRING LINE What names would you like me to analyze? Also, a thank you! to the many of you who are completing our survey and letting us know what topics you would like covered in the future, and what is most helpful or what is confusing in our presentations. -- and let us know whether or not your are interested in earning more about candlestick interpretation.

70 Q&A

71 The End